Employment Allowance
- Author
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Steven Case
What is Employment Allowance?
Employment Allowance is a government initiative that allows eligible employers to reduce their National Insurance liability by up to £5,000*
This initiative is designed to support smaller businesses with employment costs, allowing them to claim and pay less employers’ Class 1 National Insurance each time they run payroll until the maximum £5,000 allowance is used up or the tax year ends – whichever comes first.
It is important to remember that the £5,000 Employment Allowance is per business, not per employee, and can only be claimed against one payroll if your business has multiple payrolls.
Once the £5,000 allowance limit is met, any excess Employer National Insurance will need to be paid by the business to HMRC on a monthly or quarterly basis, depending on your arrangement with HMRC.
Most software will automatically track the amount of Employment Allowance you are claiming against your Employer National Insurance each month and will report this to HMRC within your RTI submissions.
Your software will stop using this allowance when you reach your maximum £5000 allowance within the tax year.
*For the current 2024/2025 tax year
Who is eligible to apply for Employment Allowance?
To be eligible for Employment Allowance, you must be:
registered as an employer
be a business or charity with documented employees
have employers’ Class 1 National Insurance liabilities less than £100,000 in the previous tax year
have at least one employee, or two or more directors who earn more than the secondary threshold for Class 1 National Insurance contributions (if you are a limited company employing directors*).
Sole traders and contractors are not eligible for Employment Allowance as they do not pay Class 1 National Insurance, nor can you claim on off-payroll workers (IR35) or individuals hired for personal work, such as a childminder or gardener.
Public bodies and businesses doing more than 50% of their work in their public sector also cannot claim (unless they are a charity).
Even if you become eligible to claim partway through the tax year, your allowance remains £5000. It is not calculated pro-rata for part-year claims.
* The secondary threshold for Class 1 National Insurance is the threshold at which Employer National Insurance becomes payable. In the 2024/2025 tax year, this threshold is £175pw or £758pcm.
** Companies with only one director and no additional employees are not eligible to claim.
How do you claim Employment Allowance?
You can claim Employment Allowance at any point during the tax year through the Real Time Information (RTI) submission* you make to HMRC as part of your payroll process. Your entitled claim amount remains £5,000 during a tax year, regardless of when you begin your claim.
Once your claim has been submitted, you can immediately start using your allowance.
The claiming process will differ depending on the software you use.
You will need to enter “Yes” into the ‘Employment Allowance indicator’ field when you next send an Employment Payment Summary (EPS)* to HMRC.
Depending on whether de minimis state aid applies to you, select the relevant response, and send your EPS as usual.
Click here for details of how to enable this claim within Xero
*Your payroll software should have a facility to make these submissions, whether automatically or via prompt.
How to stop claiming Employment Allowance
If you are no longer eligible for Employment Allowance, you will need to select ‘No’ in the ‘Employment Allowance indicator’ field when you send your next EPS.
Do not select ‘No’ unless your entire tax year was ineligible for the claim.
If you end your claim before the end of the tax year, any allowance you’ve been given will be removed, and you will have to pay any employers’ Class 1 (secondary) National Insurance due for the entire tax year.
If you have already reached the £5,000 limit before the end of the tax year or you cease to employ someone, the allowance will continue until the end of the tax year and you do not need end your claim.